Chapter 8

Concept of Solvency Ratios

The Present Chapter

This chapter presents an overview of the concept of solvency ratios.


Solvency denotes the ability of a company to pay off its long-term debt and the interest on that debt. Solvency measurement is of immense importance for financial risk analysis as it helps the business owner in determining the chances of the firm’s long-term survival. It is also used to analyze how a company is funding its operations, through shareholder’s equity or through debt or mix of each.

Solvency ratios are of interest to long-term creditors and shareholders. These groups are interested in the long-term health and survival of a business firm. In other words, solvency ratios prove that the firm can service ...

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